The Street is Now a Net Net

TheStreet.com (TST) has more than its market cap in cash and no debt. Is there value here?

TheStreet is an internet financial media company, probably still best known for its association with founder Jim Cramer. TST breaks revenues into premium services (2/3 of revenues) and marketing services (1/3 of revenues). Premium services consist primarily of selling subscriptions to investment commentary. It also includes subscription revenue from RateWatch, which is a database of bank rate and fee data, and license revenue from TheStreet ratings, which ranks stocks and mutual funds. Marketing services consist of selling ads on The Street’s network of websites. This segment also included Promotions.com, which is a marketing website that runs promotional contests on behalf of advertisers. TST bought this business in 2007 and sold it in 2009.

Here is a summary of the income statement from the past few years:

The major problem with the business is that there is no top line growth, while selling expense keeps growing. Backing out the Promotions.com business, revenues have been fairly stable around $57 million for several years. I was actually surprised how stable their revenues have been given the explosion of competition in the online finance vertical that has sprung up over the past few years. On the other hand, growth has been almost non-existent.

Gross margins are down from 07, but have been fairly consistent around 54-55%. However, selling expense has gone from 20% to 30% of sales. While both subscription and ad revenues have actually grown slightly over the last two years, selling expense has grown faster. The company attributes this mainly to increased expense in marketing paid subscriptions. This makes sense given customer churn is very high there- about 3% a month. And while churn declined in the last quarter, selling expense keeps going up. TST is having to spend more on marketing just to keep its subscriber base flat.

TST appears to be caught in a bind wherein it can’t grow revenues, but it can’t cut expenses without taking a hit to revenues. If the business can’t be improved organically, which seems likely at this point, then it will have to look other means to unlock the value of the cash stockpile.

TST could deploy its $75 million cash balance in acquisitions that could benefit from its SG&A infrastructure and utilize its $136 million in NOLs. Of course that approach carries the execution risk of overpaying or not efficiently integrating the acquisitions. TST’s major acquisitions to date (RateWatch, Promotions.com, and Stockpickr) have not been particularly successful. Management said on their last conference call that they are more interested in working on improving their existing business than doing acquisitions. However, the current CEO Daryl Otte is departing so we might see a change of direction. Also, activist shareholder FiveT Capital recently sent a letter to the board imploring TST to explore M&A to enhance value.

The other strategic option would be try to sell the company and return all of the excess cash to shareholders. The best fit if there is one would seem to be another major online finance portal like AOL. An acquirer might not be keen on the TheStreet as it is not growing and its main website has a circa 2000 feel. However, it is the ninth largest site network in the finance vertical in terms of web traffic and has 90,000 paying subscribers. An acquirer might look at it as essentially buying $31.5 million in gross profit and the question would become how much of the $33.9 million in SG&A could be cut out when TheStreet is folded onto their platform. TheStreet’s paying subscriber base might also be an attractive audience to try to cross-sell other paid content products.

The capital structure clouds the acquisition scenario and the company as a value play more generally. While TST does not have any debt, they do have preferred stock. In 2007, Technology Crossover Ventures (TCV) invested $55 million in TST in exchange for a new class of preferred stock. The idea was to use the cash to diversify through acquisitions, although TST only ended up spending about $30 million of it. TCV effectively has veto power over share buybacks and any increase to the dividend. And notably there is also a $55 million liquidation preference. So 3/4ths of the cash balance would go to TCV in an acquisition.

I don’t know if TST would be an attractive asset for any of their competitors, but an acquirer might be willing to pay 1X sales (or 2X gross profit) with the intent to cut out some of the SG&A and further monetize TST’s large audience. So let’s say the operating business goes for $60 million. We would add the $75 million in cash to the purchase price, but $55 million of that will go to TCV. So $20 million of the cash would go to the common for $80 million total. That compares somewhat favorably with the current $56 million market cap. But this scenario is far too speculative to form the basis for an investment in TST.

For now TST appears intent on just staying the course and trying to make the business profitable. TST is minimally free cash flow positive and they pay a 5.8% dividend at these levels. But I am worried about the sustainability of TheStreet’s audience and the expense creep. If the common stock had unrestricted rights to the $75 million in cash than TST might be more interesting. They would have the options of returning cash to shareholders through a larger dividend or through selling the company. But without a clear path to unlocking the value of the cash and the core business stuck in a rut I am not a buyer.